What You Need to Know Before Gifting Money to Family
This time of year usually inspires generosity and an increased desire to give. Many families use holiday time to give monetary gifts to loved ones. Let’s face it, the last few years have been tough on many families, and parents and retirees may feel compelled to help family members who have recently suffered economic consequences.
In my own practice, I find that it’s common for widows to put the needs of their children ahead of their own. They are compelled to gift money to their less-fortunate children or grandchildren but may be compromising their own financial security by doing so. While I applaud their generosity, gifting too much or in the wrong way can cause unintended consequences.
According to a recent Bankrate study, half of surveyed parents (51%) said they have sacrificed or are sacrificing their own retirement savings to help their adult children. A report published in July 2020 by Edward Jones and Age Wave found that 71% of surveyed retirees were willing to offer financial support to their family, even if it meant jeopardizing their own financial future.
Following are several considerations to keep in mind before you commit gifts of financial support to children and family this holiday season.
#1. Don’t Overcommit
While it’s only natural to want to help children and family members, think through the long-term implications of making gifts, particularly larger amounts. If helping one child this Christmas could be construed by your other children as an invitation to ask for the same, make sure you can truly afford to gift that same amount to all your kids. Talk to your advisor first to ensure that your gifts are reasonable, and don’t compromise your own financial freedom. Put another way, ask yourself if gifting now will put you in a position to require financial help down the road.
#2. Set Boundaries on Supporting Family Members
If a family member approaches you for help paying their bills or supporting their small business, make sure you have clear discussions about how far your support will extend. Can you better structure the financial support as a loan instead of an outright gift? Have you set clear boundaries upfront about what is and is not an acceptable amount of support down the road?
A common mistake that parents make is gifting the same amount every year for the holidays. You may be setting the expectation that such gifts will continue forever. Consider having a conversation about why you are gifting to your family member. If you’re providing a one-time gift for support, make sure they know that. If you don’t want to set expectations for continuing gifts, then make a commitment to stay away from giving on a regular basis, which can enable family members who need to become more self-reliant.
#3. Structure Gift Giving Appropriately
Once you give a family member a gift for an appropriate amount, keep in mind the 2023 tax rules for gift-giving. Every taxpayer can gift up to $17,000 per person, per year. This is called the annual gift tax exclusion amount. A married couple filing jointly can each give $17,000 ($34,000 total) to the same person in one year with no gift tax reporting consequences.
If the amount given to one person exceeds $17,000, a gift tax return must be filed at tax time. That’s because gifts larger than the annual exclusion amount count toward your lifetime gifting limit, which, under the 2023 IRS rules, now stands at $12.92 million. Filing a gift tax return allows the IRS to keep track of your lifetime gifts. When you make a gift of over $17,000 to one person in one year, you must file a gift tax return, but you won’t owe any gift tax unless you hit the lifetime limit amount.
If you’re working with a CPA to file your taxes, making gifts of more than $17,000 to one person can result in additional tax preparation costs. If you determine that you can afford to gift more than $17,000 to one person (and we strongly encourage you to talk to your advisor before doing so), try to structure the gift by giving $17,000 this year and another gift the following year to avoid the need to file a gift tax return.
If your child is married, consider splitting a larger gift by giving only $17,000 to your child and any additional amounts to her spouse. And be sure to write separate checks to her and her spouse so that you have proof of only giving within the annual gift tax exclusion amount to each person.
#4. Consider Loans as an Alternative Way to Support
If you are not sure you can truly afford to give money with no expectation of receiving any of it back, consider structuring a loan to a family member in need.
For example, if your daughter and her husband want to start a business and you wish to help them with this goal, you could choose to provide some part of what they need by loaning them the funds. The loan needs to be executed in writing with clearly spelled-out terms. A family loan should carry an interest rate that is at least as high as the Applicable Federal Rate (AFR), which is published monthly by the IRS. Your interest payments received must be reported as income. Structuring the financial support this way serves the dual purpose of helping a family member while ensuring that your money will be paid back to support your own needs in the future. It also ensures that the loan won’t be deemed a gift and subject to the gift tax reporting requirements.
Having an increased spirit of generosity is one of the great things about this time of year, and especially this year, which has brought hardship to so many. Gifting to family members smartly and within your means can help ensure that everyone enjoys a very happy holiday.
This is intended for educational purposes only and should not be construed as personalized investment advice.